A dynamic nonlinear model of online retail competition using Cusp Catastrophe Theory

While firms can take corrective actions to reverse gradually declining performance, sudden changes in performance are much more challenging to predict and handle. Specifically such patterns are difficult to model using traditional approaches. On the other hand, such incidents are likely to occur in complex economic systems such as the e-commerce domain. We propose a Catastrophe Theory model to capture the inherent nonlinearity and complexity that are associated with online retail competition. Theoretically and using numerical simulations, we identify conditions under which catastrophes can occur in the customer base of a less-established e-commerce firm (online retailer) competing with its more established competitor. We provide specific managerial guidelines about how the less-established e-commerce firm can strategically manage catastrophes in its customer base growth due to competition. (c) 2006 Elsevier Inc. All rights reserved.